Inflation rates are hitting levels not seen for decades. The cost of living is quickly spiraling out of control. Global Central Banks (notably The Federal Reserve) are now taking action to control rising prices. Interest rate hikes have already begun and will likely continue throughout 2022. The stock market has fallen in response, with the S&P 500 down 10% since March. Will The Fed’s actions result in a recession? Or worse yet, stagflation.

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In 2008, the Federal Reserve used unconventional monetary policy for the first time. This is what’s known as quantitative easing (QE). This was done in response to the collapse of the U.S housing market which sent ripples across the global economy. In other to encourage spending, The Fed flooded the economy with cheap liquidity. For lack of a better explanation, this is the equivalent of The Fed having a big money printer. Since 2008, $8 trillion have been printed via quantitative easing. This has devalued the dollar and largely contributed to the inflation we’re seeing today.

Global supply chains shut down in 2020 and continue to be impacted by disruptions. With supply restricted, the excessive demand for goods and services caused by quantitative easing went unmet. This resulted in an increase in prices, known as demand pull inflation. Now we’re paying significantly higher prices for energy, food and transportation.

The Fed have since pulled the plug on quantitative easing and have introduced interest rate hikes to the Federal Funds Effective Rate. The effects of this are already being felt. The 10 YR U.S Treasury yield is about to hit 3% (the highest since 2018). This implicitly results in an increased cost of borrowing. Furthermore, 30 YR Fixed Rate Mortgage rates have skyrocketed to highest levels in 11 years, worsening housing affordability. We don’t know for certain whether we’re heading for a recession, but we need to avoid stagflation at all costs.

In February, there were 11.3 million job openings in the U.S. Workers have unprecedented bargaining power due to the Great Resignation and are commanding higher wages in response to inflation. This in turn is causing further inflation. This crisis has raised the question of whether a Central Bank Digital Currency (CBDC) should act as a digital dollar. While Janet Yellen has recognized the potential viability of such a solution she also notes that it will take many years to implement.

Investors may be tempted to sell out of their stocks and index funds amidst this crisis. However, the fact remains, if you missed the best 10 days of the stock market over the last 20 years, your return on investment over that time period would be cut in half. You have to be in it to win it. While the stock market might suffer in the short-term as money rotates into bonds, in the long-term investors can be optimistic. What’s required now is cost consciousness and emotional resilience.

*Malone Financial is affiliated with the aforementioned companies. Malone Financial receives a commission for any customer conversions realized via the affiliate links. This video includes my own opinions (which do not reflect the opinions of said companies). Investing involves a risk of loss. Nothing mentioned in this video should be construed as financial advice.

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The Inflation Crisis of 2022: Explained in English

Inflation is a term that economists use to describe the rise in the general price level of goods and services in an economy. It is a measure of how much the purchasing power of money decreases over time. While inflation is a normal part of any healthy economy, the sharp spike in inflation rates worldwide in 2022 has sent shockwaves through financial markets, leading to what many are calling an “inflation crisis.”

So, what exactly is causing this inflation crisis, and what are its implications for everyday people?

One major factor contributing to the inflation crisis is the global supply chain disruption caused by the COVID-19 pandemic. The pandemic led to factory closures, transportation restrictions, and labor shortages, creating a bottleneck in production and distribution. As a result, there has been a scarcity of many essential goods and raw materials, driving up their prices.

Another factor contributing to the inflation crisis is the unprecedented amount of government spending and monetary stimulus measures implemented in response to the pandemic. Governments worldwide injected substantial amounts of money into their economies to support businesses and households, hoping to prevent a complete economic collapse. However, these measures can have unintended consequences, such as stimulating demand without an equal increase in supply, leading to price increases.

Furthermore, the increased demand for certain goods and services, such as electronic devices and housing, has also contributed to the inflation crisis. With more people working remotely and spending more time at home, the demand for technology and housing has skyrocketed. As a result, the prices for these goods have surged.

The inflation crisis has direct implications for people’s day-to-day lives. It erodes the purchasing power of money, making it more expensive to buy essential goods and services. Prices for groceries, fuel, and housing have risen significantly, putting a strain on household budgets. Additionally, inflation reduces the value of savings, making it harder for people to build wealth and plan for the future.

Moreover, rising inflation can have broader implications for the overall economy. Businesses, especially small ones, may struggle to absorb the increased costs of raw materials and labor, leading to layoffs and closures. Furthermore, inflation can reduce consumer confidence, leading to decreased spending and slowing economic growth.

Central banks, such as the Federal Reserve in the United States, have attempted to tackle the inflation crisis by raising interest rates. Higher interest rates make borrowing more expensive, reducing overall demand in the economy and helping to curb inflation. However, this approach can also slow down economic growth and have long-term consequences.

In conclusion, the inflation crisis of 2022 is a result of multiple factors, including supply chain disruptions caused by the pandemic, government stimulus measures, increased demand for certain goods and services, and more. Its implications are far-reaching, affecting the cost of living, people’s savings, businesses, and the overall economy. Finding the right balance to manage inflation without causing further damage is a complex challenge that policymakers worldwide are grappling with.